Municipal Markets Back On Track
MFS Muni Insights
Following turbulence that peaked in April, the municipal market has shown renewed strength as policy uncertainty has receded, setting the foundation for a positive second half of the year.
Performance has improved |
Yields are historically high |
Flows have rebounded |
Strong fundamentals |
Performance
Municipal performance has steadily improved since experiencing its worst week of returns since March 2020. After returning -4% the week of April 7, sentiment has stabilized, with municipals returning +2.50% since April 141, driven by the continuation of the municipal tax-exemption; an easing in rate volatility and the deferral of the most severe tariff threats.
Valuations
Municipal yields are historically high, with a yield-to-worst of 3.96%, which is well above the 20-year average of 2.92%. Furthermore, municipal yields can offer a compelling tax-equivalent yield, particularly when compared to investment-grade corporates. Even better, the higher yields come with higher credit quality compared to investment-grade corporates, which can potentially provide better downside mitigation characteristics if the economy slows. Notably, the long end of the municipal yield curve currently offers the most attractive value for investors, given historic levels of steepness. The yield differential between the 10- and 30-year maturity is at a decade high of 131 basis points versus only 54 bps for US Treasuries.
Technicals
Flows have rebounded with performance following a seven-week stretch of outflows that eased at the end of April. Since that point, net flows for the asset class have been positive for the past 10 weeks, bringing year-to-date net flows to $9.5 billion.
Fundamentals
Remain in a position of strength. State and local government tax revenues continue to grow at healthy levels year-over-year, with gains across income, property, sales and corporate tax categories. Furthermore, state rainy-day fund reserves remain at historically high levels, credit rating upgrades continue to outpace downgrades and default rates remain low. The solid fundamentals offer financial flexibility and a cushion in the event of unexpected declines in tax revenues or federal funding levels.
The airport sector has emerged as an opportunity for the MFS municipal team as tax-exempt issuance for the sector has been robust, helping to fund infrastructure upgrades across the United States. Often viewed as an essential service provider, airports favored by MFS® are generally highly rated, with solid passenger volumes, track records of financial stability and robust internal liquidity, which helps provide a cushion to absorb potential recessionary or tariff-related volatility in passenger traffic. |
| MFS National Municipal Bond Funds | ||
| FUNDS | A SHARES | I SHARES |
| MFS® Municipal Limited Maturity Fund | MTLFX | MTLIX |
| MFS® Municipal Intermediate Fund | MIUAX | MIUIX |
| MFS® Municipal Income Fund | MFIAX | MIMIX |
| MFS® Municipal High Income Fund | MMHYX | MMIIX |
| Class I shares are available without a sales charge to eligible investors. |
1 Based on the Bloomberg Municipal Bond Index as of 6/30/25.
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The views expressed are those of the author and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed. Past performance is no guarantee of future results.
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